TONY JONES: Market rallies in Australia, in Hong Kong and across Europe today on news of this government backing for bank deposits and direct investment in banks in the European case. There's been great relief all round, but could this be a false dawn?

MARC FABER: Well, we don't know how deep the economic crisis will be that will follow obviously this financial crisis. It is also assumed that the worst of the financial crisis is over, but that is just an assumption. It could get much worse, sometime in future. As of last week, world stock markets became oversold. Statistically probably the most oversold condition in the last 50 years or so. So rebound is only natural and the markets have a tendency to bottom out in the October November period and then rallying to the spring of the following year. I'd just like to remind you when the market crashed in 1929 ahead of the Depression between November '29 and the summer of 1930 the market rallied 50 per cent before collapsing again by 85 per cent and before having the greatest depression ever. So we don't know for sure, but I would say I'm very sceptical that the governments, especially Mr Gordon Brown who talks about stability and early warning systems, that he has the ability to actually bail out the system. Since he caused most of the problems to start with, and there was an early warning system always in place, namely the early warning system is that when you have bubbles in housing and in equities and in commodities, that something is very clearly wrong.

TONY JONES: Some of those bubbles are collapsing, but let's look at the bailout package. In Britain, the Government is buying large holdings in some teetering banks, even a majority holding in the Bank of Scotland which is nationalisation, because it will have a controlling interest. These are measures of last resort, the question is, will they work?

MARC FABER: Normally, governments are not very good at running banks or at running any businesses, especially not the British Government, as we know. We just have to look at public transportation. So I'm very sceptical that it will work very well and we also have to analyse the terms at which these banks are being taken over. Basically, the proper way to go about bailing out the banks is to let the shareholders lose everything at the same time, let the bondholders take a very significant cut and then the Government should come in, recapitalise the banks, nurture them to health and resell them. But to essentially bail out the banks and still let the shareholders get away with it is probably the wrong medicine.

TONY JONES: You've said recently of some of the largest European banks, the crucial problem is they become too big to fail, but also too big to be saved. Tell us what you mean?

MARC FABER: Well, I think first of all, in a perfect market you have hundreds and hundreds of competitors and if one competitor fails or goes bankrupt it's not the end of the world, because it's just one of a few hundred. In banking, it has become a business that has become heavily concentrated among a few large players and if one of these large players fails, it goes through the whole food chain of the financial system and like a domino stone that falls down, it hits the next domino stone and so forth and so on. And that is the first problem. The second problem is that in comparison to the GDP of some countries, bank's assets are far larger. And so I think that if these countries bail out the banking system they expose themselves to eventually going bust.

TONY JONES: Yes, you point to the leverage ratio of some of the giant banks like Deutsche Bank and Barclays. Can you explain to us what you mean by pointing to those leverage ratios, and what are the implications of these incredibly high ratios in those two giant banks?

MARC FABER: Let's say we are businessmen and we run our businesses and we have equity of 100 and maybe we borrow 50 and then we have a relatively high cushion in carrying our business, even if we have one year's loss or if business turns down. What the banks and investment banks and companies like Fannie Mae and Freddie Mac have done over the years is they have increasesed leverage, and that has been evident through excessive debt growth in the system everywhere in the world, but in particular in the US and in other Anglo Saxon countries. And the end result was that, say, banks they have equity of one and then sates of anywhere between 20 to 50. In other words, the cushion of safety, which was the equity was very small when compared to assets. So when assets start to go down, the equity is gone almost overnight.

TONY JONES: It is incredible. You've said that Barclays has a lending ratio of 60. The Deutsche Bank has a lending ratio of 50, that's $1 of equity to $50 of assets. Now that seems to be way out of kilter with economic rationalality?

MARC FABER: Well, I think that the problem is how do you manage that kind of a risk? And senior management and the board of directors had no idea. So essentially the banks, what they did is they packaged garbage products and they sold to their clients and thought they were smart because they earnt very big fees. Essentially, they buried themselves and that serves them right.

TONY JONES: Do you think the Europeans are facing a financial crisis in their banking system, potentially worse than the United States?

MARC FABER: Could be in some cases. In some cases the banks are more leveraged and national banks or the GDP of these countries, unlike the US, do not support a bailout. I'd like to point out in the US we have now an additional problem coming out. Commercial real estate, and then rising unemployment, rising default rate and globally, we have the credit default swap that is still a time bomb and the whole derivatives market, that is another time bomb. Then in the US, just in the last few days, the following has happened. Last week the S&P the stock market was down something like 18 per cent. But in the past when the stockmarket was down, Government bonds in the US rallied. But in the last couple of days this hasn't happened. The bond market was also weak. Obviously, if the Government bails out the entire system, the credit of the Government diminishes and in my opinion Treasury bonds in the US should already be rated as junk bonds. I'm sure the US Government will eventually go bankrupt.Maybe not tomorrow, but as far as the eye can see, we will have deficits in the US Government, deficits of more than $1 trillion annually.

TONY JONES: Let me ask you this, Gordon Brown is obviously so concerned that he's now calling for a new Bretton Woods conference. It was, of course, in 1944 and restructured the way in which the economies related to each other financially. Do we need something like that again now? Have we reached the emergency that we had in '44?

MARC FABER: Well, personally I think that Mr Gordon Brown is totally unacceptable as a politician and also as a business leader and as a, or as essentially a Treasury Secretary. And he contributed meaningfully to the current crisis, as did Mr Bernanke and as did Mr Greenspan by turning their eyes away from the development of the CDS market from the CDO market and not supervising financial institutions sufficiently and printing money and leading to this huge debt growth, in particular in Britain in the household sector. So that these clowns are now supposed to bail us out is a total joke. I think what they should have done is having a conference already 10 years ago and discuss why is it that credit growth is so strong and that we have these asset bubbles that develop in various markets at different times? And at that time, they should have tightened monetary policies and not only targeted core inflation, but also targeted debt growth and money supply growth.

TONY JONES: You've actually said there is a housing asset bubble in Australia, and also you pointed to the household debt of ordinary Australians as being a huge future problem.

MARC FABER: For sure.

TONY JONES: Do you think Australia is going to get swept up to the same degree, or are we insulated?

MARC FABER: No, I think probably even worse, because don't overlook the fact the US is in very bad shape, but very simply put ... here, I oversimplify, the US doesn't produce anything, it consumes. So if consumption goes down in the US, Okay, Americans become a bit slimmer, that's very good if the obesity rate drops in America and they consume less electronics, they drive around a little bit less, it's not the end of the world. But the translation mechanism goes then into the producers for America. Notably, China and other Asian countries that then have falling industrial production and diminishing exports to the United States. And, therefore, their demand for raw material goes down and so the Asian economies are like a warrant on the US economy. When the US does well they do particularly well, and when the US does badly they're hit very hard and that then goes through to the resource producers, to OPEC, to Russia, to Australia and these countries in my opinion are actually quite vulnerable, especially given the large foreign debt of Australia.

TONY JONES: We're also already, in fact, hearing that some steel mills in China are cutting demand for iron ore. They're actually calling on smaller miners in Australia to actually postpone delivery of orders. Do you think that will spiral, get worse?

MARC FABER: Yeah, I think so, because if you look at the global synchronised boom 2001 2007 it began in the US and then it led to strong growth in China and as China was growing strongly, the industrial production went up, exports went up and then capital spending went up very substantially. And when capital spending picks up, then obviously the demand for commodities does not only go up because of local consumption and industrial production, but because of the capacity expansion. And when the recession comes the expansion is cut down and that leads to a slump in the demand for commodities. We've seen the Baltic Dry Index collapse, oil prices drop from close to $150 a barrel to around 80. Of course it will hit Australia, and very badly so.

TONY JONES: You've also pointed, and I'd mentioned this before to the asset bubble in housing prices in Australia. Are we, in this country, do you think, due for a major correction?

MARC FABER: Yes, I think so, major correction. Because if you look back at Australia we always had booms and busted and they tended actually to be more pronounced than in the United States. So I think we had a colossal boom in home prices and to some extent, also in commercial real estate in shopping malls and so forth and that will go in reverse. It is very difficult to call the bottom, but I think these things take time and if you look at Japan, we peaked out in 1989 on the Nikkei at 39,000. We're now at 9,000 or so. So it can take a very long time and I think this crisis will be a crisis, a milestone in economic history. The way people used to ask, "Are you born before 1929 or after 1929, or before the World War II, or after World War II?" People will ask in future, "Were you born before 2007, or after 2007?"

TONY JONES: Well Marc Faber, living up to your gloomy reputation there, I'm afraid. We thank you for your reality check, however, and we'll hopefully speak to you again in the short term. Thanks for joining us.